On the identification of sales forecasting models in the presence of promotions

By | April 19, 2014

J.  R. Trapero, N. Kourentzes and R. Fildes, 2014, Journal of the Operantional Research Society, 66: 299-307. http://dx.doi.org/10.1057/jors.2013.174

Sales forecasting is of paramount importance to reduce inventory investment, enhance customer satisfaction and improve distribution operations. Shorter product life cycles, more competitive markets and more aggressive marketing, among other factors, have increased the complexity of sales forecasting. Forecasts are often produced using a Forecasting Support System that integrates univariate statistical forecasting with managerial judgment. One of the main reasons to use expert judgment is to forecast sales under promotional activity. An alternative approach to promotional forecasting is to replace expert adjustments by multivariate statistical models that use past promotions information, resulting in regression models whose exogenous inputs are promotion features (price discounts, type of display, type of advertising, etc.). Nonetheless, these regression type models may have a large dimension as well as multicollinearity issues. This work proposes a multivariate method that reduces the dimensionality of the problem by using Principal Component Analysis and models the error term as a transfer function identified by minimizing the Schwartz Information Criteria. To provide promotional forecasts for items with limited history we pool information across products. The performance of the model is compared against forecasts provided by experts and statistical benchmarks, on weekly data from a manufacturing company; outperforming both substantially. We find that the proposed multivariate model, developed on the basis of past promotional information, outperforms expert promotional adjustments.

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3 thoughts on “On the identification of sales forecasting models in the presence of promotions

  1. Pingback: Value of judgemental adjustments to promotional forecasting – Forecasting Society

  2. Dmytro


    Is it possible to publish the data/model or at least a snapshot of an R code? Thank you!


    1. Nikos Post author

      Hi Dmytro,

      Unfortunately we cannot release the data, as it is coming from a real company and it is under a non-disclosure agreement.
      With regards to the code this was done in MatLab, using built-in commands and the ECOTOOL toolbox. The latter was used for the estimation of the model, but the more recent versions of MatLab already include powerful commands to build the transfer function parts needed to construct the model of the paper. I have not done much coding in the recent versions of MatLab, so on top of my head I do not know the necessary commands. The PCA part was done using built-in functions.



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